Is 2020 Finally Over?

Welcome to the New Year.  IMHO we are on the cusp of something not seen in a great while - a real bear make that lasts more than a year, rather than the sharp downturns lasting only a few weeks that have been prevalent the last three years.  With sentiment as extremely bullish as it is now, this is the only thing that makes sense.

The focus next week will be on the Georgia runoff elections for two Senate seats.  Polls are showing the Dems with a small lead, while betting sites favor the GOP.  I decided to take a look at the bond option bets using the TLT OI for Jan 15 and it is showing the smart money betting on a breakout for higher int rates.  Target is about 153 for the TLT from 158 or about 1.1% for the TNX and appears to support a Dem victory.  Perhaps this will rattle markets.  

This is the last week that I will be showing the SPX indicators back to Jan 2018 since the charts are becoming too busy and next week will switch to a two year period.  In the Tech/Other section, several indicators are shown including the Equity puts and call and VIX Buy/Sell indicator.

I. Sentiment Indicators

The overall Indicator Scoreboard (INT term, outlook two to four months) bearish sentiment remains in a tight range as the SPX consolidates above 3700.

The INT view of the Short Term Indicator (VXX $ volume and Smart Beta P/C [ETF Puts/Equity Calls], outlook two to four months) bearish sentiment continues to slowly decline.

Bonds (TNX).  Bearish sentiment in bonds fell slightly lasy week as prices consolidated.

For the INT outlook with LT still negative, the gold miners (HUI) bearish sentiment fell sharply although there was little price change, possibly with hopes of higher inflation with a Dem POTUS.

II. Dumb Money/Smart Money Indicators

The option-based Dumb Money/Smart Money Indicator as short/INT term (outlook 2 to 4 mns/weeks) bearish sentiment rose slightly last week, but remains near recent lows.

And the sister options Hedge Ratio bearish sentiment was mostly unchanged.

The INT term NDX Long Term (2x/DM) ETFs (outlook two to four weeks) bearish sentiment continued to decline.

III. Options Open Interest

Using Thur closing OI, remember that further out time frames are more likely to change over time, and that closing prices are more likely to be effected. Delta hedging may occur as reinforcement, negative when put support is broken or positive when call resistance is exceeded.  This week I will look out thru Jan 8. Also, this week includes a look at the GDX and TLT for Jan exp. 

With Fri close at SPX 3756, options OI for Mon shows net put support from 3700-25 and strong support at 3675 with moderate call resistance starting at 3750.

Wed has somewhat smaller OI where SPX support/resistance is similar to Mon.

For Fri w/Dec jobs report, much the same with strong put support at 3700 and weaker call resistance starting at 3750.

Using the GDX as a gold miner proxy closing at 36, the exact neutral point.  Strong call resistance starts at 38, while small put support starts at 34.

Currently the TLT is 157.7 with the TNX at 0.92%, similar to late Oct when the TNX was at .75% before rising to .97%, smart money (contrarian) is taking a very large bearish put position that is targeting 155.5 then 153, where the TNX should be about 1.1%.

IV. Technical / Other

First, a look at the Equity puts and calls (relative to SPX avg vol) were down 10% for the week, but with SPX vol down 30% showed a spike higher.  Highs for both puts and calls were seen at the Jan 2018, Sept 2018 and Feb 2020 tops.

As an update on the VIX Buy/Sell indicator with a big jump in the SKEW on Fri dropped to -1.22 and may be a couple of weeks from the -1.5 SD official Sell level.

The SPX ETF hedge ratio (SSO/ETF calls) is similar to the options Hedge Ratio and at levels simlar to Oct 2018 and Feb 2020.  My feeling is that this is more of a fundamental top similar to Oct 2018 where an initial decline will likely see a consolidation before the final crash wave as in Dec 2018, where Mar 2020 was an event driven decline.

Conclusions.   Overall sentiment is showing that a major top could occur any day, but SPX options OI is still indication that many are still expecting a ST pullback below 3600 before a final blow off rally.  A more contrarian view is a continued distribution (rounded) top, possibly into mid-Jan.  With hedging still moderate, a crash wave is unlikely, while a 10-15% decline into late Feb, would likely be followed by a consolidation for 3-6 months that may cover a wide range similar to Nov 2018, before a larger decline.  One EWer looking for a more immediate decline is OntheMoneyUK from Dec 31.

With Bitcoin going up 10% a day, you have to believe anything is possible.  Next week could be pivotal for the economic outlook as control of the Senate is up for grabs, where a GOP win means more gridlock and a Dem win means stronger spending, but with higher deficits and int rates or higher taxes or both.

Weekly Trade Alert.  The next two weeks are likely to remain range bound between SPX 3700-800 into the Jan 15 optn exp with a breakout in TNX above 1% likely.  Updates @mrktsignals.

Investment Diary,  Indicator Primer,
 update 2020.02.07 Data Mining Indicators,
 update 2019.04.27 Stock Buybacks,
 update 2018.03.28 Dumb Money/Smart Money Indicators